By Joshua Rich --
On August 20, 2024, Judge Ada E. Brown of the U.S. District Court for the Northern District of Texas issued an order granting summary judgment to the plaintiffs in Ryan LLC v. Federal Trade Commission, a lawsuit challenging the legality of the FTC's Final Rule prohibiting non-compete agreements. Judge Brown found that the Final Rule both exceeded the FTC's statutory authority and was arbitrary and capricious because it "is unreasonably overbroad without a reasonable explanation." Her decision is the Federal courts' first final decision on the Final Rule, but it conflicts with a Pennsylvania decision on preliminary injunction proceedings, issued just last month. Thus, we haven't seen the last decision on the FTC's non-compete rule.
On April 23, 2024, the FTC issued its Final Rule prohibiting non-compete agreements, which would take effect 120 days later, on September 4, 2024.[1] The Final Rule prohibited new non-compete agreements entered into after the effective date and freed employees other than "senior executives" from existing non-compete agreements. The same day the Final Rule was issued, however, Ryan LLC (a tax services firm with its headquarters in Dallas, Texas) sued the FTC, seeking to prevent the Final Rule from ever going into effect. Ryan was later joined by a number of intervenors, including the U.S. Chamber of Commerce and the Business Roundtable. Ryan's lawsuit was based on the Administrative Procedure Act ("APA") and argued: (1) the FTC exceeded its statutory authority by issuing the Final Rule, (2) the FTC's Final Rule was an unconstitutional usurpation of Congressional power, and (3) the Final Rule was arbitrary and capricious.
The plaintiffs (both Ryan and the intervenors) filed a motion for preliminary injunction in June, and Judge Brown granted the preliminary injunction on July 3, 2024, enjoining the FTC from implementing the Final Rule against the plaintiffs and staying the effective date of the Final Rule. But the injunction applied only with regard to the named plaintiffs, not to all parties. Then, less than three weeks later, Judge Kelley B. Hodge of the U.S. District Court for the Eastern District of Pennsylvania entered an order in ATS Tree Services, LLC v. FTC denying a motion for preliminary injunction against the enforcement of the Final Rule. There was therefore some question whether Judge Brown might reconsider her stance.
She did not, and instead granted summary judgment to the plaintiffs, finding that the Final Rule violated the APA and "shall not be enforced or otherwise take effect on September 4, 2024, or thereafter." Her review started with the text, structure, and history of enforcement under the FTC Act. Section 5 of the FTC Act empowers the FTC to "prevent persons, partnerships, or corporations . . . from using unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce."[2] Section 6 of the Act then provides the Commission the power to make rules and regulations to carry out the purposes of § 5.[3] Further, § 18 provides the FTC the power to promulgate "interpretive rules and general statements of policy with respect to unfair or deceptive acts or practices in or affecting commerce."[4] In the context of the FTC Act, however, Judge Brown found that those rulemaking provisions allow making only interpretive or procedural, not substantive, rules with regard to unfair methods of competition. She further found that the lack of statutory sanction provisions for violation of rules and the FTC's practice under the Act (promulgating no substantive unfair competition rules for more than the past 50 years and instead enforcing its mandate judicially) confirm her interpretation of the rulemaking provisions of the FTC Act. Thus, Judge Brown found the enforcement mechanism of the FTC Act allows only adjudicative, not rule-based, enforcement. As a result, any substantive rulemaking with regard to unfair competition, including the Final Rule would exceed the FTC's statutory authority.
Judge Brown also found the Final Rule to be arbitrary and capricious, despite the FTC's consideration of over 26,000 comments and over 500 pages of explanation of why the Final Rule was adopted. In one of the first applications of the Supreme Court's Loper Bright case,[5] which overturned Chevron deference, Judge Brown independently considered both the support provided by the underlying studies and comments and whether the remedies adopted by the Final Rule were properly scoped. She found neither to be the case. First, quoting the standard established by the Supreme Court, she found, "The Rule imposes a one-size-fits-all approach with no end date, which fails to establish a 'rational connection between the facts found and the choice made.'"[6] Second, she found that the record did not support the Final Rule because no state has enacted a non-compete rule as broad as the Final Rule,[7] and the FTC failed to explain why a less broad prohibition would be insufficient to satisfy the needs of the public. Thus, considering the evidence essentially de novo, Judge Brown found the Final Rule to be unsupported by the record.
Notably, Judge Brown did not rule on the constitutional arguments raised by the plaintiffs. It is not clear if she did so under the Last Resort Rule (under which courts avoid resolving constitutional questions if there is some other ground sufficient to support the court's decision) or some other reason. But those questions still lurk in the background, and may be resuscitated if an appellate court overturns Judge Brown's decision.
In addition to a possible direct appeal from the decision in the Ryan case, the FTC is continuing to litigate the Final Rule in the ATS Tree Services case. Since the ATS Tree Services case is pending in the Third Circuit, seen as less conservative than the Fifth Circuit in which an appeal of the Ryan case would lie, the FTC may prefer that forum for appellate review. However, wherever an appeal is heard, it is not unlikely the case ends up before the Supreme Court, which would have an opportunity not only to drive a stake deeper into the heart of Chevron deference by clarifying (and narrowing) the scope of the FTC Act, but also to narrow deference to agencies on the basis for their decisions. Judge Brown limited the FTC's arguments against her ruling that the Final Rule was arbitrary and capricious to those set forth in the Final Rule, but allowed the plaintiffs to introduce additional evidence to rebut the factual record set forth therein. As a result, under the analytical framework applied here, the FTC is fighting with one hand tied behind its back.
The Ryan District Court's decision will not be the final word on the FTC's non-compete rule, but it creates a difficult hill for the government to climb. Indeed, under the reasoning set forth, the FTC cannot adopt any substantive rule to diminish unfair competition -- regardless of whether it is tied to restrictive covenants or otherwise. But even if the FTC can adopt substantive competition rules on other topics, it appears the eight years of work and thousands of comments from the public on non-compete agreements may be all for naught.
[1] For a discussion of the FTC rule, including the possibility that it would be struck down by the courts, see https://www.patentdocs.org/2024/04/ftc-bans-non-compete-agreements.html.
[2] 15 U.S.C. § 45(a)(2).
[3] 15 U.S.C. § 46(g).
[4] 15 U.S.C. § 57a.
[5] Loper Bright Enters. v. Raimondo, 144 S. Ct. 2244 (2024).
[6] Quoting Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43, 103 S. Ct. 2856, 2867, 77 L. Ed. 2d 443 (1983) (quoting Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 168, 83 S. Ct. 239, 246, 9 L. Ed. 2d 207 (1962)).
[7] As a practical matter, California's ban on non-compete agreements between employers and employees is as broad as the FTC Final Rule. But Judge Brown relies on her preliminary injunction opinion rather than performing a state-by-state analysis here.
Posted at 10:40 PM in District Court, Miscellaneous | Permalink | Comments (0)
By Kevin E. Noonan --
Policy differences are endemic in politics, and the phrase "causing more heat than light" regarding federal drug policy comes readily to mind listening to the rhetoric coming from the Federal Trade Commission in this regard. The FTC is infamous for its uncontrolled venom towards industries they believe with religious fervor to be charging consumers prices higher that the FTC thinks they should be. This tendency was evident in the fight over reverse payment settlements in ANDA litigation, leading to a Supreme Court decision imposing a "rule of reason" standard rather than the draconian per se standard the Commission espoused in determining whether an antitrust violation had occurred (see FTC v. Actavis). And it is with similar rhetorical excesses that the Commission has begun its latest crusade involving listing on the Food and Drug Administration's Orange Book for patents claiming medical devices relating to administering FDA-approved drugs.
It will be recalled that the FTC spent the better part of a decade attacking the practice of innovator drug companies settling ANDA litigation by providing payments to generic applicants challenging the validity of Orange Book-listed patents (see "The FTC's Thinking Does Not Make It So Regarding Reverse Payment Agreements"; "Federal Trade Commission Issues Report on Reverse Settlement Agreements in FY2010"; "FTC Releases Another Report on Reverse Payment Settlement Agreements in ANDA Litigation"; "The FTC Is at It Again"). These agreements were termed "reverse payment" settlements because unlike in most patent suits, the defendant secured a payment from the patentee (as part of its campaign, the FTC termed these "pay-for-delay" agreements). The Commission persisted in its efforts despite most Federal Courts of Appeal deciding that, rather than being anticompetitive, the agreements frequently resulted in generic drugs coming to market much earlier than would be expected (see "Valley Drug Co. v. Geneva Pharmaceuticals, Inc."; "Schering-Plough Corp. v. Federal Trade Commission"; "In re Tamoxifen Citrate Antitrust Litigation"; "In re Ciprofloxacin Hydrochloride Antitrust Litigation"; "Arkansas Carpenters Health & Welfare Fund v. Bayer AG"; and "Federal Trade Commission v. Watson Pharmaceuticals, Inc."). One basis for the FTC's persistence was the belief that branded drug companies settled because they were aware that their patents were invalid and thus improperly tried to extend their "monopoly"; of course this position supposed not only that innovator drug companies were willing to contravene the antitrust laws but perhaps more importantly that the Commission's bureaucrats had a better understanding of the pharmaceutical industry than the executives making the decisions. Persistence being what it is, the FTC finally prevailed in finding a Circuit Court (the Third) to accept its arguments (see "The Federal Trade Commission Finally Wins One"), leading to the Supreme Court deciding the issue in FTC v. Actavis.
The FTC's latest foray into policing pharmaceutical companies and their patent behavior was set forth in a policy statement promulgated last fall, entitled "Statement Concerning Brand Drug Manufacturers' Improper Listing of Patents in the Orange Book," in a classic example of begging the question and one viewed through the Commission's prism of purported patent malfeasance by branded drug companies.
As it did with the reverse settlement issue, the FTC's attitude seems to be that something might be happening and then to proceed as if it is. This is evident from the first sentence of the policy statement, which asserts that "[b]rand drug manufacturers may be harming generic competition through the improper listing of patents in the Food and Drug Administration's ('FDA') Approved Drug Products with Therapeutic Equivalence Evaluations, known as the 'Orange Book'" (emphasis added). The statement then extols the benefits of generic competition (which is fine as far as it goes, but of course there needs to be something to copy in the first place for the generics regime to be effective). There is a general allegation in the midst of this rhetoric -- the statement asserts that "certain manufacturers have submitted patents for listing in the Orange Book that claim neither the reference listed drug nor a method of using it," and if so, of course the Commission is empowered to and intends to pursue such manufacturers who are purportedly "abus[ing] the regulatory processes set up by Congress to promote generic drug competition" under the power to investigate unfair trade practices under 15 U.S.C. §§ 45(a), (n).
The justification for the Commission's concerns stems apparently from the results of a 2002 study (FED. TRADE COMM'N., GENERIC DRUG ENTRY PRIOR TO PATENT EXPIRATION: AN FTC STUDY 39-52 (2022), that supposedly involved improper listing, further citing an enforcement action in that year against Biovail (In re Biovail Corp., FTC Dkt. No. C-4060 (Oct. 2, 2002)). Also cited are a total of four instances where the Commission filed amicus briefs in cases where there may have been improper listing, such as patents for a system to implement a REMS (not a medical device). The consequence of such listings, the statement asserts, is to invoke the 30-month stay in approval attendant upon the NDA holder (or her licensee) filing suit against an ANDA applicant, because "even small delays in generic competition can generate substantial additional profits for brand companies at the expense of patients." Patients would be harmed because they would be "deprived of the ability to choose between competing products and may be forced to pay inflated prices." Of course the 30-month stay while statutory is not mandatory; should the infringement action be dismissed (for example, on motion that the patent asserted were improperly listed in the Orange Book), the FDA would be able to expeditiously approve the ANDA and the generic company enter the marketplace (with its own 180-day exclusivity if a first filer; under these circumstances the extent to which patients would pay deflated prices would be itself delayed).
Having established at least to its own satisfaction the basis for the Commission's attention to this issue, the statement then announced the FTC's intention to "enforce the law against those companies and individuals who continue to improperly list patents in the Orange Book" using "its full legal authority to protect patient and payors . . . from business practices that tend to negatively affect competitive conditions." This threatened exercise of the Commission's legal authority finds its basis in "the FTC's historical use of Section 5 [of the Clayton Act]" based on improperly listing a patent in the Orange Book being an unfair method of competition. The statement goes on to speculate that improperly listing a patent in the Orange Book "may . . . constitute illegal monopolization," perhaps evincing a recognition that agency overreach was not greeted warmly by the Supreme Court in Actavis with regard to the FTC's position that reverse settlement agreements were a per se antitrust violation. Treading cautiously, the statement further warns that "improperly listing patents in the Orange Book may also be worthy of enforcement scrutiny from government and private enforcers under a monopolization theory" and calls out the possibility (or likelihood) that it "may also scrutinize a firm's history of improperly listing patents during merger review" (emphasis added). Finally, the statement suggested that "individuals" (presumably corporate officers) who "submit or cause the submission" of patents improperly to the Orange Book may be held liable individually, and that a finding of a false certification under 21 C.F.R. § 314.53(c)(2)(ii)(R) could be sent to the Department of Justice for investigation of criminal liability. Should all else fail, the Commission also states that it "may" dispute individual Orange Book listings through the FDA process set forth in 21 C.F.R. § 314.53(f)(1) that permits "any interested person" to request patent information in the Orange Book be corrected.
Mostly in footnotes, the statement identified no more than 10 cases in support of the statement (and one of those, Fed. Trade Comm'n v. Shkreli, 581 F. Supp. 3d 579, 637 (S.D.N.Y. 2022), involved the infamous "Pharma Bro" whose shenanigans can hardly be held up as a standard under which ethical branded drug companies conduct their businesses). In view of the powers the Commission can wield, the assertions, allegations, and promises of future activities set forth in the statement cannot be ignored, but it also cannot help but raise the question of whether this tempest should not have remained in the teapot from whence it sprung, at least without further evidence that improper listing occurs frequently enough to significantly impact drug prices paid by the patients and payors the FTC is attempting to serve and protect from (in the Commission's view, apparently) predatory branded drug companies.
Most recently, the FTC sent letters almost identical in substantive import to ten major drug companies (Amphaster Pharma, AstraZeneca, Boehringer Ingelheim, Covis Pharma, GlaxoSmithKline, Glaxo Group Ltd., Norton (Waterford) Ltd., Novartis, Novo Nordisk, and Teva Pharmaceuticals); the identical language of these letters indicates that presumption of wrongdoing rather than any individual, identified malfeasance prompted the campaign. The letters were accompanied with the FTC's announcement and accompanying statements by Commission Chairwoman Lina Khan that:
"By filing bogus patent listings, pharma companies block competition and inflate the cost of prescription drugs, forcing Americans to pay sky-high prices for medicines they rely on."
"By challenging junk patent filings, the FTC is fighting these illegal tactics and making sure that Americans can get timely access to innovative and affordable versions of the medicines they need"
(appropriate in tone for the former enfant terrible author of "Amazon's Antitrust Paradox" (Khan, Lina M. (January 2017), Yale Law Journal, 126 (3): 710–805).
The current spate of threatening letters is similarly devoid of evidence and long on supposition, quoting from the earlier Policy Statement that:
". . . patents improperly listed in the Orange Book may delay lower-cost generic drug competition" [and]
"In addition to delays resulting from such a stay of approval, the costs associated with litigating improperly listed patents may disincentivize investments in developing generic drugs, which risks delaying or thwarting competitive entry."
The letters further warn that the FTC has chosen to use the statutory pathway under 21 C.F.R. § 314.53(f)(1)(i)(A) for disputing "the accuracy or relevance of patent information submitted" to FDA for Orange Book listing but that the Commission "retain[s] the right to take any further action the public interest may require, which may include investigating this conduct as an unfair method of competition under Section 5 of the FTC Act, 15 U.S.C. § 45." These stratagems enable imposition of civil (monetary) penalties, but the earlier warning in the Policy Statement that "if the FTC encounters false certifications filed under 21 C.F.R. § 314.53(c)(2)(ii)(R) that may constitute a potential criminal violation for the submission of false statements, the Commission may refer such cases to the U.S. Department of Justice for further investigation" has not been abjured.
This latest action raises the question of why these companies and what behavior prompted the Commission to act now? Each letter contains a table of the patents whose listing the Commission calls into question, summarized as follows herein:
A closer look shows that what these patents protect are, by and large, medical devices that provide either greater accuracy in administered dose or increased patient convenience and accompanying greater patient compliance; for example:
U.S. Patent No. 7,654,986 (expiration expected July 12, 2024) (Novo Nordisk)
Claim 1: A needle mounting system for mounting and dismounting a needle assembly onto a needle mount of an injection device, comprising . . .
Specification:
Injection devices, also referred to as dosers, have greatly improved the lives of patients who must self-administer drugs and biological agents. Dosers may take many forms, including simple disposable devices that are little more than an ampoule with an injection means or they may be highly sophisticated instruments with numerous functions. Regardless of their form, they have proven to be great aids in assisting patients to self-administer injectable drugs and biological agents. They also greatly assist care givers in administering injectable medicines to those incapable of performing self-injections.
U.S. Patent No. 8,161,968 (expiration expected February 5, 2028) (GSK)
Claim 1: A medicament dispenser for containing plural elongate form medicament carriers, each medicament carrier having multiple distinct medicament dose portions carried thereby, . . .
Specification:
The Applicant has now found that in providing a medicament dispenser of this type a number of practical problems and design challenges are encountered.
One problem is that of providing a dispenser device that is able to accommodate the plural medicament carriers, but is of sufficiently small overall size that it is conveniently portable (e.g. in the pocket or bag of a patient) and amenable to discrete use, by the patient.
Another problem is that of providing a dispenser device, in which the distinct medicament dose portions of each of the plural medicament carriers may be indexed or accessed without the need for the user to apply undue indexing or accessing force. Particular challenges are faced when the plural medicament carriers are required to be moved through the dispenser device for indexing/accessing thereof, and where the indexing/accessing action is coupled (e.g. moving peelable blister strips through the dispenser device to both index a particular blister on each strip and peelably access that blister).
U.S. Patent No. 8,182,838 (expiration expected October 20, 2028) (Novartis)
Claim 19: A pharmaceutical composition comprising composite active particles prepared in accordance with the method as claimed in claim 1, blended with carrier particles.
Claim 36: A dry powder inhaler containing a composition as claimed in claim 19.
Specification:
WO 00/74754 and many other publications over a period of more than twenty years have described how, particularly in powder inhalers, there is a considerable problem with moisture. Not only can moisture have a disadvantageous effect on the pharmaceutically active composition of the medicament, it can also impair in particular the interplay of physical and chemical parameters of the combination of active substance and auxiliaries. As a result, lumps may form, for example, or the breakdown of the inhaled powder into particles which can access the lungs may be impaired. All these circumstances can lead to problems affecting the metering and the efficacy of the administration of a powdered medicament.
To minimize these disadvantages, various attempts have already been made in the past to reduce the penetration of moisture into a powder inhaler by using seals. Attempts have also been made to reduce the disadvantageous effects of penetrated moisture by providing desiccants to absorb the moisture, in particular to keep the air moisture in storage chambers to a minimum.
And a close look at the frequency with which these patents have been asserted in an abbreviated new drug application (ANDA) litigation shows that most of them have not been so asserted. Of the 61 patents identified in the FTC's letters (presumably indicating some level of differentiation to select somewhat- to particularly egregious-examples of bad behavior), 34 have never been asserted and eight others have been asserted in only five ANDA cases. The anomaly are 19 patents asserted in 209 cases, with the majority of these being directed to Ozembic, Saxenda, and Victoza. Whether this exemplifies over-exuberance, bad acting, or justifiable protection of devices providing patient-specific advantages remains to be determined.
In at least one case, the FTC's crusade has proven to be persuasive to a district court, Teva Branded Pharmaceutical Products R&D, Inc. v. Amneal Pharmaceuticals of New York, LLC (Civil Action No. 23-20964 (SRC), U.S. District Court of New Jersey) (Opinion & Order). The decision arose in ANDA litigation over Teva's ProAir® HFA (albuterol sulfate) Inhalation Aerosol product, wherein Teva asserted U.S. Patent Nos. 8,132,712; 9,463,289; 9,808,587; 10,561,808; and 11,395,889. These patents claimed devices for administering the drug product, and Amneal moved (and the District Court held) that these patents should be delisted from the Orange Book. The basis for the court's decision was that these patents did not claim the drug product and thus were improperly listed under the requirements of 21 U.S.C. § 355(b)(1)(A)(viii)(I). (The FTC garners credit, or blame, for the decision by its filing of an amicus brief heavily relied upon and cited in the opinion, for which Commission Chair Kahn was quick to publicly claim responsibility. In rendering its decision, the Court relied on the First Circuit's decision in Cesar Castillo, Inc. v. Sanofi-Aventis U.S., LLC (In re Lantus Direct Purchaser Antitrust Litig.), 950 F.3d 1, 3 (1st Cir. 2020), that a listed patent must be directed to the drug product and the Second Circuit's decision in United Food & Commer. Workers Local 1776 v. Takeda Pharm. Co., 11 F.4th 118, 134 (2d Cir. 2021), that the question of proper listing was based on what the patent claimed and not what would infringe those claims (to the extent, unexplicated in the District Court's decision, that these would be different). It must be recognized that the District Court's decision was based, inter alia, on Teva's assertion that these patents were listed as reciting the drug rather than reciting methods for administering the drug.
(Perhaps more troubling is that the District Court denied Teva's motion to strike Amneal's counterclaim that improper listing can amount to an antitrust violation under 21 U.S.C. § 355(j)(5)(c)(ii)(II) and particularly rejected Teva's claim that such listing does not raise antitrust liability under the Supreme Court's decision in Verizon Communs., Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 398-99 (2004)).
The circumstances surrounding this most recent FTC endeavor bring back to mind the circumstances in the reverse settlement situation, where the first case involved what apparently was in fact an abuse of the statute and could have been an antitrust violation (and in which private parties and "[t]he attorneys general of all 50 States, Puerto Rico and the District of Columbia (the 'attorneys general) eventually joined the litigation on behalf of their States and as parens patriae on behalf of the residents of their respective jurisdictions"; see "In re Cardizem CD Antitrust Litigation, 332 F.3d 896 (6th Cir. 2003)"). Thereafter, every such settlement was not just suspect but evidence of anticompetitive behavior merely by its existence, with the only motivation contemplated by FTC's philosophy being that patentees were aware of the invalidity of the patents at issue and were attempting to "buy off" challengers. The counter-narrative (understood and explicated by the Chief Justice in his dissent in FTC v. Actavis), that the investment by innovative pharmaceutical companies and vagaries of any litigation mitigated against taking unnecessary business risks, was lost on the FTC and undoubtedly will be so again here. How these ten pharmaceutical companies respond to the FTC's mandate will vary, no doubt (and asserting these patents in ANDA litigation is likely imprudent when routine avenues of recourse may suffice). But these alternatives may involve a higher degree of disruption of markets and patient-availability of the medicines under NDA and also reduce investment into new and better ways of administering drugs known to be more difficult to administer than conventional drugs or that would provide real-world benefit for patients. The Policy Statement and the FTC's actions in enforcing it being in their early stages it is impossible to predict the outcome. But if earlier FTC ideology-based efforts are a guide it is likely to be a protracted struggle.
Posted at 10:44 PM in Miscellaneous | Permalink | Comments (4)
By Joshua Rich --
The Federal Trade Commission, voting 3-2 along party lines, adopted a Final Rule banning non-compete agreements. The Final Rule allows some narrow exceptions (based both on time and circumstances) but prospectively prohibits employment-related non-competes to the full extent of the FTC's jurisdiction when it takes effect in 120 days. As the FTC noted in adopting the Final Rule, mounting abuses and distortions of the labor market led to this action. But there remains a key question to be litigated before the Final Rule takes effect -- whether the FTC has the power to ban non-compete agreements and, if so, to what extent.
The Final Rule sets up a simple regime for non-compete agreements that would be entered into after the Effective Date: employers cannot do it, except as part of a sale of a business (whether the bound person is selling the business as a whole, in part, or substantially all of the assets). That is, employers can no longer enter into non-competes with employees or independent contractors after the effective date, cannot represent to a worker that they are subject to a non-compete clause, and cannot seek to enforce or attempt to enforce a non-compete entered into prior to the effective date (unless the cause of action accrued before the effective date).
With regard to non-compete agreements entered into by employees before the effective date, the Final Rule voids the vast majority of them. It establishes an exception, however, for "senior executives" -- company officers who have policy making authority to make decisions that control significant aspects of the business, such as company presidents, CEOs, secretaries, treasurers, or CFOs. Such officers also must make over the oddly specific sum of $151,164 in total annual compensation.[1] The Final Rule allows those senior executives to be bound to non-compete agreements entered into before the effective date, at least to the extent permissible under state law.[2]
Importantly, the scope of what could be construed as a non-compete agreement is quite broad. It includes any written or oral contractual employment term or workplace policy
that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:
(i) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or
(ii) operating a business in the United States after the conclusion of the employment that includes the term or condition.
The intent of the broad definition is to capture not only express non-compete agreements, but also overly broad non-disclosure agreements ("NDAs"), non-solicitation agreements, and training repayment agreements ("TRAPs"), as well as other de facto non-competition provisions. But there is no clear safe harbor for what type of agreements or terms would be excluded from the definition of a non-compete provision; it is not intended to include prohibitions on trade secret misappropriation or properly-scoped NDAs, but there are situations where a worker practically could not accept employment with a competitor without a substantial risk of trade secret misappropriation. So employers are left in the dark, not knowing if they can enforce a prohibition or not and potentially subject to FTC enforcement if they are believed to have acted in less than good faith.
In addition to prohibiting new non-compete agreements, the Final Rule requires employers to provide notice to employees who are currently subject to non-competes that they will be freed from those obligations. The Final Rule has the text of a "safe harbor" notice, which must be delivered by hand, mail, email, or text to the last known address or number of an employee or former employee. That is, even if an employer has not sought to enforce a non-compete agreement against a former employee, it must go back to its files and dispel any perception that it would enforce the agreement against a former employee in the future.
The Democratic members of the FTC (but not the Republicans) reached the conclusion that the Final Rule was appropriate based on over 26,000 comments, 570 pages of reasoning, and numerous studies of the prevalence of non-compete provisions. Approximately 20% of American workers are subject to non-compete agreements.[3] Most notoriously, Jimmy John's made its sandwich makers subject to onerous non-compete provisions, prohibiting them from moving to greener pastures at Subway or Potbelly's. But such provisions are also quite common in the medical field. While they bring stability to hospitals and doctor's groups, they impede unhappy doctors and nurses from switching practices while continuing to serve their existing patients (instead requiring them to move geographically to continue practicing or wait out the non-compete provision). The problems created are especially acute in rural areas, where there may already be limited options for patients, even without the limitations imposed on doctors' movement.
The FTC Final Rule shifts substantial power from employers to employees. It provides no way for employers to recoup investment in employee training and other capital development, and requires them to fall back on trade secret law and NDAs to protect their confidential information. It therefore will place a greater enforcement burden on employers, which will place a premium on putting strong IP protection policies in place and having competent trade secret litigators at the ready. But it also will encourage innovation and fluidity in the labor market, potentially freeing employees to use public information and job skills to develop their own businesses or help grow more hospitable companies.
All of this relies, however, on the courts not striking the Final Rule down as exceeding the bounds of the FTC's power under the Federal Trade Commission Act. The report on the Final Rule provides extensive argument justifying why the three Democratic Commissioners believe the Final Rule to be in the FTCs mandate. But it is a question of what paradigm the courts adopt: is the Final Rule a means of regulating conduct between businesses (albeit through the mechanism of employer-worker relations) at the outer edge of the FTC's power or is it interference in the labor market only incidentally related to interstate commerce? Decisions on the legality of prior rules provides no clear answer, and the outcome may depend on the record presented to the deciding judge (as well as the identity of the deciding judge). If the question comes before the current Supreme Court, there will be a substantial likelihood that the Court will not defer to the FTC's expertise on construing its own powers.
In the meantime, employers should prepare for the possibility that they will have to comply with the Final Rule. That means reviewing what non-compete provisions they have outstanding (including NDAs, non-solicitation agreements, TRAPs, employee handbooks and other agreements). Employers then must figure out which may still be enforceable and which will be negated by the Final Rule and prepare to provide notice to employees and former employees who will no longer be bound by non-competes. But just as importantly, they must sit down and rethink their IP protection strategy and determine how they can ensure employees will not be walking out the door and taking trade secrets to competitors. In short, the disappearance of the clear (but blunt) tool of non-competes may force employers to adopt completely different policies for protecting their IP.
[1] The FTC chose this amount because it represents the compensation for 85th percentile of full-time salaried employees nationally in 2023. But the choice of the 85th percentile was arbitrary -- it was proposed to be raised from the 80th percentile as the metric for "highly-compensated employees" in September 2023. Furthermore, it is not pegged to the earnings of officers, but employees as a whole.
[2] In California, non-compete agreements that are not incident to the sale of a business are already not enforceable. The Final Rule does not allow such agreements, it just does not prohibit them.
[3] Notably, lawyers cannot be subject to traditional non-compete agreements under existing ethical rules. The reasoning for the prohibition on non-competes in the legal field is that it would impact clients' choice of counsel.
Posted at 10:54 PM in Miscellaneous, Trade Secrets | Permalink | Comments (2)
By Joshua Rich --
Aside from the actual games on the field, the college football press has been fixated on one story over the past several weeks: the Michigan "sign stealing" controversy. Michigan head coach (and former Chicago Bears quarterback) Jim Harbaugh has been suspended from appearing at the field for the last three games of the season -- including the critical game against Ohio State -- by the Big Ten conference, and may see further punishment when the NCAA completes its investigation. But the entire process could have been prevented by a more innovative approach to technology, which could have brought even greater opportunities to forecast opposing teams' plays.
The existence of "signs", let alone stealing them, is a relatively recent innovation in the history of college football. For decades, coaches chose a play and told it to a player on the sidelines, who would then run onto the field and convey it to the entire team in a huddle.[1] As offensive coaches decided in 1980s and 1990s that they wanted to speed up the pace of play and limit defensive substitutions, they realized the biggest delay between plays was huddling. So they started signaling plays to the team with hand signals. However, those hand signals were not only clearly visible to the other team (and therefore readable and decipherable), but also limited to a relatively small number of plays that could be communicated by gestures. Then came an innovation that allowed a wider variety of signals -- large placards or signs that could be held up by student assistants in numerous permutations and various orders to indicate different plays, as well as different formations.[2] However, the problem of visibility of the signs remained.
The NCAA became concerned that the visibility of signs could create even greater inequality between college football teams because large, well-funded programs would be able to scout or "steal" signs at an opponent's games earlier in the season. It therefore put in a rule in place in 1994 that bears some resemblance to trade secret rules. Trade secret laws, such as the Federal Defend Trade Secrets Act ("DTSA"), define protectable trade secrets as any type of information if "(A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information."[3] Similarly, NCAA Bylaw 11.6.1 provides that "[o]ff-campus, in-person scouting of future opponents (in the same season) is prohibited."
The NCAA rule protects only information that is not known to the general public without a license (such as a game ticket). For example, if a coach shouts the play from the sidelines so that it is audible to players on the field, there is no protection against the other team using that information; that is why the placards with seemingly random symbols have been adopted as "reasonable measures" of keeping the information secret. But in this case, there are two "proper means" of scouting that avoid a complete ban. First, in-game sign stealing (that, deciphering the signs while the game is being played) is permissible. Second, reading signs from the television broadcast of an earlier game -- an activity that can be performed on campus -- is acceptable. Furthermore, like trade secret laws, a team is allowed to use reverse engineering to determine the play from the publicly-visible signs.[4]
Michigan's problems with the NCAA's sign stealing rule arose out of a mysterious private investigation[5] of a Michigan staffer with the colorful name of Connor Stalions. Stalions came to the Michigan football program from the Navy rather than the traditional route of playing the sport. He appears to have started his scouting work in compliance with the rules, by watching recorded television broadcasts of games. He allegedly eventually crossed far over the line, however, by buying tickets to opponents' earlier games and having associates record the sideline signals throughout the game with smartphones. Allegedly, the complete-game videos were then synched to the on-field action to allow a correlation of the signs to the plays. Stalions then would stand near the coaches during Michigan games, allegedly to communicate the upcoming play to them from the signs shown on the far sideline.
While such a scheme would clearly run afoul of the NCAA sign stealing rule -- if the allegations are true -- a crowdsourcing, big data approach might very well avoid any rule violation. Many college football programs have rabid fanbases that would be willing to do almost anything to support their chosen team.[6] If fans learned that a team would benefit from having recordings of the sidelines of upcoming opponents, many likely would be willing to make and provide such a recording. They could then post the recoding on the internet (for example, hosted on YouTube) and coaches would be able to review and decipher the signs from on campus after the games. So long as the fans were not employed or directed by the school, such a crowdsourcing approach would appear to be legal.[7]
In addition, crowdsourcing a future opponent's signs from several sources so that the correlation to plays could be made would allow deeper analysis of the data. For example, once such a correlation is identified, an AI-based approach could not only allow prediction of which plays an opponent would like run in a given situation (with stolen signs providing a failsafe for the prediction) and identify the best players, formations, and plays to combat the opponent's plays. Essentially, rather than relying on a coach's "gut instinct", an AI could serve as a predictive tool that would suggest the best approach -- essentially serving as a replacement for an existing coach. Thus, one of the first jobs that could be replaced with AI would be one of the jobs that nobody has suggested would be vulnerable: football coach.
[1] In fact, as Michigan has simplified its playbook and started calling more running plays -- 32 in a row against then sixth-ranked Penn State! -- it has reverted to huddling much more frequently and communicating plays to the huddle without signs.
[2] An example of such signs used by the Michigan football team last week are shown here:
[3] See 18 U.S.C. § 1839(3).
[4] 18 U.S.C. § 1839(6) provides that "the term 'improper means' . . . does not include reverse engineering, independent derivation, or any other lawful means of acquisition."
[5] It is not clear who retained and paid the private investigator who uncovered the information at the heart of the controversy.
[6] As one notorious example, in order to "punish" Auburn for a victory over Alabama, one Alabama fan poisoned the oak trees standing at Toomer's Corner by the Auburn campus merely because Auburn fans would celebrate victories by wrapping those trees in toilet paper. The trees had otherwise played no part in the game.
[7] Other Big Ten teams, including Ohio State, are alleged to have done something similar by providing their in-game sign stealing to other teams playing against Michigan.
Posted at 08:43 PM in Artificial Intelligence, Miscellaneous, Trade Secrets | Permalink | Comments (11)
Posted at 12:38 AM in Miscellaneous | Permalink | Comments (0)
By Michael Borella --
After using a large language model, such as ChatGPT, for a while, it is not hard to image an array of nightmarish scenarios that these generative artificial intelligence (AI) programs could bring about. While ChatGPT and its emerging rivals currently have "guardrails" -- ethical limits on what it will do in response to a prompt -- the bounds thereof are not well understood. Through clever prompting, it is not hard to convince the current iteration of ChatGPT to do away with certain guardrails from time to time. Further, the companies behind these models have not defined the extent of the guardrails, while the very structures underlying the models are well known to behave in unpredictable ways. Not to mention what might happen if a "jailbroken" large language model is ever released to the public.
As an example, a user might ask the model to describe terrorist attack vectors that no human has ever previously conceived of. Or, a model might generate software code and convince a gullible user to download and execute it on their computer, resulting in personal financial information being sent to a third party.
Perhaps one of the most relevant risks of large language models is that once they are implemented and deployed, the marginal cost of creating misinformation becomes close to zero. If a political campaign, interest group, or government wishes to inundate social media with misleading posts about a public figure, a policy, or a law, it will be able to do so at volume without having to employ a roomful of humans.
In 2021, the European Commission of the European Union (EU) proposed harmonized rules for the regulation of AI. The Commission recognized both the perils and the benefits of AI and attempted to come up with a framework for regulation that employs oversight in proportion to the specific dangers inherent in certain uses of AI. The resulting laws enacted by member states would potentially have the Brussels Effect, in that EU regulation of its own markets become a de facto standard for the rest of the world. This is largely what happened for the EU's General Data Protection Regulation (GDPR) laws.
But very few people saw generative AI coming or the meteoric rise of ChatGPT at the end of 2022. Thus, the Commission is in the process of re-evaluating its rules in view of these paradigm-breaking technologies.
The Commission's proposal places all AI systems into one of three risk levels: (i) unacceptable risk, (ii) high risk, and (iii) low or minimal risk. The amount of regulation would be the greatest for category (i) and the least (e.g., none) for category (iii).
Uses of AI that create an unacceptable risk include those that violate fundamental rights, manipulate individuals subliminally, exploit specific vulnerable groups (e.g., children and persons with disabilities), engage in social scoring (evaluating the trustworthiness of persons based on their social behavior), and facilitate real-time biometric recognition for purposes of law enforcement. These uses would be prohibited.
A high risk AI may be classified as such based on its intended purpose and modalities of use. There are two main types of high risk systems: (i) those intended to be used as safety component of products (e.g., within machinery, toys, radio equipment, recreational vehicles, and medical devices), and (ii) other systems explicitly listed (e.g., involving biometrics, critical infrastructure, education, employment, law enforcement, and immigration). These categories are quite broad and would impact many diverse industries. The proposal sets forth detailed legal requirements for such systems relating to data governance, documentation and recording keeping, transparency and provision of information to users, human oversight, robustness, accuracy, and security, as well as conformity assessment procedures.
Regarding low or minimal risk AI systems, their use would be permitted with no restrictions. However, the Commission envisions these systems potentially adhering to voluntary codes of conduct relating to transparency concerns.
To that point, the proposal also states that "[t]ransparency obligations will apply for systems that (i) interact with humans, (ii) are used to detect emotions or determine association with (social) categories based on biometric data, or (iii) generate or manipulate content ('deep fakes')." In these situations, there is an obligation to disclose that the content has been machine-generated in order to allow the users to make informed choices.
Currently, the Commission is considering whether to place ChatGPT and its ilk in the high risk category, thus subjecting it to significant regulation. There has been pushback, however, from parties who believe that the regulations should distinguish between harmful uses of these models (e.g., spreading misinformation) and minimal-risk uses (e.g., coming up with new recipes, composing funny poems). In other words, the amount of regulation that applied to ChatGPT should vary based on its use -- and aesthetically pleasing goal but one that would be difficult to carry out in practice because of the model's broad scope and general applicability.
Whether this results in the proposed regulations being delayed and/or rewritten remains to be seen. The Commission will be taking up the issue.
Posted at 10:55 PM in Miscellaneous | Permalink | Comments (5)
By Michael Borella --
On March 16, the Copyright Office published guidance in the Federal Register relating to works produced at least in part by generative artificial intelligence (AI). This is the latest in a series of policy decisions and statements that the Office has made to applicants attempting to register such works.
While AI has been a viable technology for decades, improvements in computer processing and storage capabilities of the last 15 years have enabled the rise of machine learning, a branch of AI in which a computer system can be trained on a large amount of data in order to "learn" underlying patterns within. In many cases, these patterns are too subtle for a human to notice or require analysis of a massive data set in order to be perceived. As an example, spam filters often use trained machine learning models to classify email messages as either spam or not spam.
But generative AI takes machine learning to a whole new level. In 2022, sophisticated generative AI tools were released to the public for the first time. Rather than considering an observation of data and classifying it in some fashion, generative AI models can create new observations -- particularly images (DALL-E 2, Stable Diffusion, and Midjourney) and text (ChatGPT) -- from a user's textual prompt.
The results can be simultaneously remarkable, startling, and disturbing. But since the models were trained on existing works found on the Internet, they may exhibit some (or many) similarities with these previous works. Thus, one issue is whether the output of generative AI is a derivative work or infringes upon the rights of a previous author.
The purpose of this guidance, however, is to inform the public about the Office's current policy regarding "whether the material [the generative AI models] produce is protected by copyright, whether works consisting of both human-authored and AI-generated material may be registered, and what information should be provided to the Office by applicants seeking to register them."
At one end of the spectrum, the Office has a long-held position that copyright can only be used to protect the products of human creativity. Therefore, when presented in 2018 with an application for an image that was described as ''autonomously created by a computer algorithm running on a machine," the Office denied registration to the work as lacking a human author. Last year, the Office initially registered a graphic novel in which the images were generated using Midjourney and then combined with human-authored text, but recently modified the registration to indicate "that the individual images themselves could not be protected by copyright."
The guidance adds some color to the Office's decision making process regarding the human authorship question. Particularly, the Office states:
In the case of works containing AI-generated material, the Office will consider whether the AI contributions are the result of ''mechanical reproduction'' or instead of an author's ''own original mental conception, to which [the author] gave visible form.'' The answer will depend on the circumstances, particularly how the AI tool operates and how it was used to create the final work. This is necessarily a case-by-case inquiry.
As an example, if the human merely provided a prompt to the generative AI model and then the model goes on to produce "complex written, visual, or musical works in response," then the ''traditional elements of authorship are determined and executed by the technology—not the human user." In that context, the Office notes that "prompts function more like instructions to a commissioned artist" who then makes the artistic decisions.
But the Office recognizes that there can be a threshold amount of human creativity within a work that also contains the output of a generative AI model such that the work as a whole or parts thereof are registerable. The Office provides examples such as where "a human may select or arrange AI-generated material in a sufficiently creative way" or that "an artist may modify material originally generated by AI technology to such a degree that the modifications meet the standard for copyright protection." Nonetheless, in these hybrid cases the copyright protection will only extent to the human-authored aspects.
With these principles in place, the Office goes on to provide procedural guidance to applicants seeking to register hybrid human / AI works. Notably, they must "identify the author(s) and provide a brief statement . . . that describes the authorship that was contributed by a human." For a work that "creatively arranges the human and non-human content," the applicant must "describe human-authored content created by the author and describe AI content generated by artificial intelligence." Alternatively, the applicant can "provide a general statement that a work contains AI-generated material." Then, the "Office will contact the applicant when the claim is reviewed and determine how to proceed."
For existing applications that do not adhere to these guidelines, the Office requires that the applicants "contact the Copyright Office's Public Information Office and report that their application omitted the fact that the work contained AI-generated material." This will be considered by the examiner when considering the application.
To correct an existing registration, the applicant must submit a supplementary registration that describes "the original material that the human author contributed" and "disclaim the AI-generated material." The Office will issue a supplementary registration certificate if there is sufficient human authorship.
If an applicant fails to update such applications and registrations, the registrations may be cancelled. Likewise, a court can disregard a registration if it was obtained through deceiving the Office regarding aspects of its authorship.
Generative AI has proven to be a technologically and socially disruptive paradigm. Individuals, businesses, and governments will likely be wrestling with its implications for years to come. In the mean time, it is good to see the Copyright Office being proactive regarding hybrid authorship rather than letting these issues be addressed piecemeal in the courts. Like many issues in copyright, the authorship inquiry is likely to be highly fact-sensitive and subject to few clear lines of demarcation.
Posted at 11:59 PM in Miscellaneous | Permalink | Comments (1)
Posted at 09:32 PM in Miscellaneous | Permalink | Comments (1)
By Kevin E. Noonan --
A little over two years ago, U.S. District Court Judge Manish Shah sitting in the Northern District of Illinois held that AbbVie did not violate Sections 1 or 2 of the Sherman Antitrust Act by amassing a large number (132) of patents to protect its best-selling drug, Humira® (adalimumab) (see "An Analysis of a Failed Biosimilar Antitrust Class Action"). Yesterday, in Mayor and City Council of Baltimore v. AbbVie Inc., the Seventh Circuit Court of Appeals affirmed the District Court's decision to dismiss the complaint in a unanimous verdict that took the Court sixteen months to hand down.
To recap, the issue arose in a class action lawsuit against AbbVie and AbbVie Biotechnology Ltd. by consumer groups, drug wholesalers, and unions (including the City of Baltimore, Miami Police Department insurance trust fund, and a Minnesota-based employee welfare benefits plan for workers in the pipe trade industries), as well as corresponding state law causes of action for Alaska, California, District of Columbia, Georgia, Illinois, Nevada, New Hampshire, North Carolina, Utah, and West Virginia. The basis of the complaint was AbbVie's actions in seeking and obtaining additional patents when the patent on the adalimumab molecule itself (U.S. Patent No. 6,090,382) was set to expire on December 31, 2016. AbbVie filed 247 patent applications, resulting in 132 patents, and this behavior was sufficiently anticompetitive, plaintiffs argued, that it rose to the level of an antitrust violation under the Sherman Act.
The District Court discerned the following allegations in the class action Plaintiffs' complaint:
• that AbbVie "cornered the market" on Humira (and other, unnamed biosimilar drugs) by "anticompetitive conduct";
• that AbbVie obtained and asserted patents "to gain the power it needed to elbow its competitors" out of the Humira market;
• that AbbVie then entered into agreements with those competitors "to keep their competing drugs off the market" (and then, paradoxically, "gave those competitors permission to market their drugs in Europe"; unremarked is that AbbVie gave those same competitors permission to enter the U.S. market a few years thereafter, without having to face those dastardly and profuse patents).
The District Court dismissed the complaint under the rationale that:
Plaintiffs say that AbbVie's plan to extend its power over Humira amounts to a scheme to violate federal and state antitrust laws. But what plaintiffs describe is not an antitrust violation. AbbVie has exploited advantages conferred on it through lawful practices and to the extent this has kept prices high for Humira, existing antitrust doctrine does not prohibit it. Much of AbbVie's petitioning was protected by the Noerr Pennington doctrine, and plaintiffs' theory of antitrust injury is too speculative.
The District Court agreed with AbbVie that "there is nothing illegal about amassing a broad portfolio of legitimate patents" under Sherman Act § 2 and, to the extent that some of these patents may turn out to be improvidently granted, "the Noerr–Pennington doctrine immunizes them from liability." Regarding the Section 1 allegations, the District Court agreed with Defendants that these settlement agreements don't violate the Sherman Act because "they[] allow AbbVie's competitors to enter the market before the expiration of AbbVie's patents, do not involve any reverse payments from AbbVie (the patentee) to Amgen, Samsung Bioepis, and Sandoz (the alleged infringers), and only divvy up the market in ways consistent with AbbVie's patent rights." And while the District Court agreed that even if a single one of AbbVie's patents are not invalid and infringed that would have been sufficient to keep the biosimilar applicants from marketing Humira biosimilars until that patent expired (a date that would have been very much later than January 2023), for Plaintiffs' antitrust allegations to create liability against Defendants, Plaintiffs would need to show that AbbVie had obtained each and every one of its patents "unlawfully," which the Court found was unlikely, as a "but-for" cause of Plaintiffs' alleged injury.
The 7th Circuit affirmed, in an opinion by Judge Easterbrook joined by Judge Wood and Judge Kirsch. The opinion begins with a litany of precedent that the parties did not rely on (for AbbVie, Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977) on jurisdictional grounds, and for plaintiffs, Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172 (1965) for inequitable conduct or "fraud on the Patent Office"). But the heart of the Court's opinion can be found in almost its first legally substantive sentence, where the Court asks plainly "what's wrong with having lots of patents"? And further, the Court states that "[t]he patent laws do not set a cap on the number of patents any one person can hold—in general, or pertaining to a single subject," citing In re Brand Name Prescription Drugs Antitrust Litigation, 186 F.3d 781 (7th Cir. 1999). Tellingly the opinion goes on to note that "[t]ech companies such as Cisco, Qualcomm, Intel, Microsoft, and Apple have much larger portfolios of patents" and "Thomas Edison alone held 1,093 U.S. patents." Finally in this regard the Court notes that the Federal Trade Commission tried, and failed, to establish antitrust liability against Qualcomm based on the sheer number of patents that company had amassed. FTC v. Qualcomm Inc., 969 F.3d 974 (9th Cir. 2020).
The Court recognizes the distinction between valid and invalid patents, but notes that Plaintiffs did not allege that they will invalidate all 132 of AbbVie's patents. Nor was the Court persuaded by the fact that "the 132 patents can be traced to continuation applications from 20 root patents" (which "seem neither here not there" to the panel). As for the argument that these patents are "weak" the Court says this "leaves us cold" because a weak patent is just one having limited scope not one that is "illegitimate." Those arguments are appropriate in proceedings like inter partes review the opinion states, for which the Patent Trial and Appeal Board have found more consistently that challengers have failed (13 instances) to satisfy the statutory requirements for challenge than it has found a challenged patent invalid (3) (and noting that in still other instances AbbVie has prevailed before the Board).
The Court also recognizes the disjointed nature of Plaintiffs' argument that, while eschewing Walker Process-based allegations maintained its Section 2 challenge merely because AbbVie obtained the (presumptively) valid patents and asserted them against competitors. While the law recognizes that "objectively baseless petitions" to the government can be an antitrust violation, Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, Inc., 508 U.S. 49 (1993), like the District Court the panel noted that AbbVie had a "batting average" of .534 for patent procurement (a 53.4% allowance rate), which "cannot be called baseless." But without this ground "[t]rying to conjure liability out of successful petitions for governmental aid in blocking competition runs into the Noerr-Pennington doctrine according to the opinion, Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961); Mine Workers v. Pennington, 381 U.S. 657 (1965). Other grounds for finding antitrust liability (unsuccessful petitioning that increases competitors' costs, such as filing frivolous lawsuits, citing BE&K Construction Co. v. NLRB, 536 U.S. 516 (2002)) did not exist under the circumstances before the Court (although the panel recognized there may be ways for AbbVie to assert their patents that the Noerr-Pennington doctrine would not protect).
Turning to the Section 1-based allegations arising from the settlement agreements, the opinion first notes that those settlement agreements permitted biosimilar entry much earlier than the expiration date of at least some of AbbVie's patents. The Court views these agreements as "compromises" and the agreements do not violate the Sherman Act under Supreme Court precedent in favor of settlements in litigation. But the opinion states that the basis of one such possible antitrust violation, falling under the Court's FTC. v. Actavis decision, cannot arise here because there is no exclusivity period for the first biosimilar filer as there was in Actavis for the first ANDA filer. "The payors do not contend that there is anything fishy or anticompetitive about the settlements allowing entry in 2023 without any payment from AbbVie to the potential entrants," the opinion asserts, and acknowledges Plaintiffs' argument that the differential entry date of Humira biosimilars in Europe (2018) and the U.S. (2023) could produce a similar "reverse-payment deal" here. Neither the District Court nor this panel were persuaded because there was no "pay-for-delay" ("0+0=0") in these settlements. There were also factual distinctions between the settling parties and the legal and regulatory conditions in the European countries that were contrary to Plaintiffs' arguments that somehow somewhere someone had or could make money they should not have been able to make under these agreements. And to the extent Plaintiffs' argument sounded in the economic theory of "opportunity costs" the panel understood the Supreme Court's Actavis decision to have "considered, and rejected, the argument that an opportunity cost is the same as a reverse-payment settlement."
The District Court characterized Plaintiffs' arguments as "a new kind of antitrust claim" that "brings together a disparate set of aggressive but mostly protected actions to allege a scheme to harm competition and maintain high prices." Attorneys making novel legal theories of course is how the law progresses. Indeed, the current Chair of the Federal Trade Commission became something of an enfant terrible based on her law review article on antitrust in the technological age (Khan, Lina M. (January 2017), "Amazon's Antitrust Paradox", Yale Law Journal, 126 (3): 710–805). But a risk of some legal theories arises when they are outcome oriented to the extent that they ignore traditional legal principles in search of the desired outcome. (The dissent by Chief Justice Roberts in Actavis is illustrative of the dangers attendant thereupon.) And the mantra of the undesirability if not illegality per se of so-called patent thickets for blockbuster drugs can appear politically expedient but is not supported by the facts, as shown inter alia by Mossoff, Unreliable Data Have Infected the Policy debates over Drug Patents, Policy Memo, Hudson Institute, January 2022. For now, this latest flight of legal fancy has crashed on the rocks of antitrust jurisprudence reality but it would be imprudent not to expect other attempts prompted by patent protection of blockbuster drugs (and their related costs) to arise.
Posted at 10:37 PM in Miscellaneous | Permalink | Comments (0)
By Michael Borella --
Given the recent bust cycle of cryptocurrencies and non-fungible tokens (NFTs), all things blockchain are currently tainted with words such as "bubble", "scam", and "fraud". But blockchain technology, which is what enables cryptocurrencies and NFTs, remains a remarkably innovative tool. When implemented properly, it can be used to create an immutable distributed digital ledger of transactions that is highly resistant to most forms of hacking. Indeed, evidence of the efficacy of blockchain to solve specific real-world problems is beginning to emerge. If all you can think of is Bitcoin or bored apes when someone mentions "blockchain", perhaps it is time to reconsider your understanding of the field.
Particularly, the notion of smart contracts -- snippets of computer-executed code that can be embedded into a blockchain to control the transfer and use of digital assets -- has opened the door to a world of innovation. NFTs are the most well-known use of smart contracts, but other uses include banking, investing, real estate, gaming, and many more.
Not unlike the world-wide web circa 1993, blockchain is a new frontier, the applications of which are vast. It is hard to see where the technology is going or how it will be used in the future. The most likely outcome is that there will be a large number of spectacular failures, but also a few successes that could potentially be integrated into 80-90% of software moving forward.
Patent assignments at the U.S. Patent and Trademark Office (USPTO) are stored in a publicly-accessible database operated by the USPTO. These assignments record various entities' interests in a patent or patent application through a chain of title.
The initial ownership of a patent asset usually lies in its inventors. The inventors typically assign their rights to the patent asset to another entity (e.g., an employer). Liens against these interests can be recorded, as well as further transfers to other entities through sale, mergers and acquisitions, legal proceedings, and so on.
Could the USPTO implement its assignment database as a privately-controlled blockchain? In short, the answer is "yes" -- and doing so could possibly enable a number of interesting use cases.
In fact, the USPTO's assignment database is a natural candidate for recording in a blockchain. It is largely a write-only database of transactions in which records are rarely expunged (see M.P.E.P. § 323). As new assignments are recorded, they can be added in new blocks. These blocks can be mined (verified) by USPTO computer systems to ensure than they are proper. Advantageously, standard smart contracts could be used to make assignment verification automated and effectively instantaneous for the vast majority of transactions. This would be a significant improvement over today's manual verification process which can take weeks or months in some situations.
For example, before an assignment transaction is placed in a block on the blockchain, the USPTO could verify that the assignor has the right to assign the patent asset. Since the blockchain will record each asset's chain of title, the current ownership of the asset is known. Thus, for instance, if the blockchain specifies that the asset was initially owned by entity A, transferred to entity B, then transferred to entity C, and has no subsequent transfers, entity C is the current owner. Therefore, only entity C has the authority to transfer the asset to other entity, say entity D. If some other entity E attempts to transfer or place any type of encumbrance on the asset, this transaction will fail mining procedures and not be placed on the blockchain. As a consequence, the current ability for erroneous or fraudulent patent assignments to be filed effectively disappears.
Of course, this means that all entities with interest in a patent asset would need to have an account or identity with the USPTO's assignment blockchain, and keep its credentials secure from conventional hacking attempts (e.g., phishing). Many patentees already have such accounts in place with the USPTO. Also, keeping an account secure is already a requirement for any person or entity using online banking, ecommerce, and so on. The risk is well-understood and widely accepted at this point, and use of blockchain does not make the system any less secure.
If a patentee's credentials are stolen and fraudulent transactions are successfully placed on the blockchain, this could be resolved in court, as it would be today. To facilitate correction of such transactions, the USPTO could have the sole authority to place an "override" transaction on the blockchain that nullifies a specific previous transaction, and therefore returns title for an asset to its rightful owner.
It may not be possible or desirable for all inventors to have their own USPTO assignment blockchain accounts, so an initial assignment agreement from the inventors to an assignee could be verified by including form language in a programmatically-interpretable document. As long as the names of the inventors match those on the filed application and are accompanied by their verifiable digital signatures on the assignment proper, it would be assumed by smart contract code that this assignment is valid. Again, disputes to such validity could be challenged in courts, as they are today.
Further, mechanisms to add inventors to an asset or remove inventors from an asset would need to be supported.
Another aspect of the proposed mining that would be beneficial is that it would have a low computational load compared to say, Bitcoin mining, since there would be no need to solve proof-of-work puzzles. There would also be no need to reward the miners with coins or tokens from the blockchain (to be clear, this blockchain need not implement any coins, tokens, or currency -- it could be purely a ledger of transactions). The USPTO's current systems would likely be able to handle the computational cost of mining. Alternatively, other U.S. government entities (or interested third parties) could offer servers to mine transactions and store their own copies of the assignment blockchain (of course, the blockchain consensus protocol would have to be arranged so that the USPTO has ultimate control over the determination of whether a transaction is valid).
A USPTO assignment blockchain would have a number of interesting potential properties that could be exploited by way of smart contract.
As one example, certified copies of a patent asset could be minted on demand as an NFT. For a small fee, a unique PDF or image file could be generated and digitally signed by the USPTO to verify its authenticity. This could even be used to replace patent plaques typically given to inventors by their employers with NFT-based awards instead.
Also, smart contracts could be used to put various types of conditions and obligations on a patent asset. For example, companies might incentivize their inventors to disclose more inventions by placing an obligation on all future owners of an asset to pay the inventors some percentage of future licensing, sales, settlements, or judgments involving to that asset (e.g., the inventors get 10% of the total value of such transactions). This would allow inventors of commercially-valuable patents to enjoy the financial benefits of their inventions in a fashion that is more equitable than, say, a one-time nominal payout upon filing or grant.
Since patents can only be asserted when all owners agree to do so, such contracts would have to clearly separate ownership of a patent asset from an obligation of the owner to compensate a previous owner for the asset's future revenue.
Another potential use of smart contracts would be for ownership of an issued patent to revert to its previous owner should the current owner fail to pay maintenance fees on time. Then, the previous owner would have a short grace period in which it could either pay the maintenance fees or let the patent expire. Or, the initial owners of the patent could specify in a smart contract that the patent will be dedicated to the public within, say, 10 years of issuance regardless of who owns the patent at that time.
A virtually unlimited number of additional uses for a blockchain-based assignment database may be possible. As was the case for the web in the early 1990's, there is a "wild west" aspect to blockchain in the early 2020's. But most experts agree that the underlying technology is sound and highly adaptable. It remains to be seen if, when, and how, these advances will impact patent operations.
Posted at 09:00 PM in Miscellaneous | Permalink | Comments (2)
By Kevin E. Noonan --
Personal jurisdiction is one of those basic concepts in civil procedure that evokes strong memories in most lawyers, of their first year in law school, cases like International Shoe, Burger King, Helicopteros, and World-Wide Volkswagen, and perhaps even a bit of painful nostalgia for a time when they were maybe a little overwhelmed by the process of learning the law. But there is a reason considerations like personal jurisdiction are part of the basic introduction to legal education, not the least of which is the real-world consequences that can arise involving them. A case illustrating this reality was decided recently in Apple Inc. v. Zipit Wireless, Inc. (and as a bonus, the Federal Circuit expressly disclaimed a misapprehension by the District Court that it had enunciated a bright line rule regarding personal jurisdiction in patent cases).
The lawsuit on appeal was a declaratory judgment action brought by Apple in the Northern District of California, but the dispute predated the filing of Apple's complaint by several years. As described in the Federal Circuit's opinion, Zipit approached Apple in 2013 regarding its assigned patents, U.S. Patent Nos. 7,292,870 and 7,894,837, which claimed "wireless instant messaging devices that use Wi-Fi to send and receive instant messages." For the next three years, there were "several rounds of correspondence" between them as well as an in-person meeting in Cupertino, home of Apple corporate headquarters (and in the Northern District). This correspondence and these communications involved whether Apple was willing to purchase the patents outright or license them, inter partes review proceedings involving the patents, and whether Apple was infringing based on technical details of its products (as well as the possibility of willful infringement). These discussions were fruitless and Zipit filed a patent infringement lawsuit in the Northern District of Georgia on June 11, 2020, which Zipit two weeks later voluntarily dismissed without prejudice; this was followed by Apple filing the declaratory judgment suit that was the basis for this appeal nine days after Zipit voluntarily dismissed its Georgia action.
Because it is relevant to the personal jurisdiction question, the opinion set forth in some detail the history of the negotiations between the parties:
The record before the district court indicates that Zipit first traveled to Apple's Cupertino headquarters on December 3, 2013. Following this in-person meeting, the parties had "at least" four "detailed calls" in December 2013, February 2014, and March 2014. During these meetings and calls, Apple and Zipit discussed licensing the patents-in-suit and Apple's contentions that it "does not practice any Zipit patent claims" and that the "patents[-in-suit] are invalid." Indeed, the parties went so far as to exchange competing drafts of a license agreement in August and September 2014 but ultimately did not reach any agreement. Zipit traveled to Apple's Cupertino offices for a second in-person meeting to continue discussions on January 13, 2015.
Following the January 2015 meeting, Apple and Zipit exchanged numerous letters and emails throughout 2015 and 2016. The first email, dated July 18, 2015, was sent by Mr. Stephen Risley (Zipit's outside counsel) regarding "Apple's Ongoing Infringement" of the patents-in-suit. This email, directed to Apple's in-house counsel (Mr. Rudhir Patel) sought a "definitive response" from Apple regarding the parties' ongoing discussion of Apple's "purchase and/or license" of the patents-in-suit. Referencing a discussion that had taken place the day prior, Mr. Risley also attached for Apple's review Zipit's opposition brief to a petition for IPR of the '837 patent. He also noted that additional briefs as to other patents were forthcoming. Mr. Risley concluded: "I understand that Apple will review Zipit's IPR briefs and respond to Zipit in 1-2 weeks."
Apple responded two months later. On September 25, 2015, Mr. Patel sent Mr. Risley a letter reiterating Apple's view that it "does not need a license" to the patents-in-suit "because Apple does not practice any" claims of the patents-in-suit and the claims are invalid. In describing its grounds for noninfringement, Apple referred specifically to deficiencies in claim charts it had received from Zipit. Apple also stated that its view that the claims were invalid was "confirmed by [its] review of the materials before the [Patent Trial and Appeal Board], and additional prior art not being considered" in the pending IPRs.
The discussions escalated. On October 14, 2015, Mr. Risley sent a responsive letter addressed to Mr. Patel (with Apple's Cupertino office listed on the address line) regarding "Apple's Ongoing Willful Infringement" of the patents-in-suit. In the letter, Mr. Risley conveyed Zipit's "continue[d]" belief that "Apple has and continues to willfully infringe" the patents-in-suit. He concluded the letter by referencing willful infringement a second time: "Zipit is confident that if it becomes necessary a Court will view your September 25, 2015 [letter] as nothing more than a transparent attempt by Apple to justify Apple's past, present, and future willful infringement of Zipit's patents." Apple responded to this letter on December 8, 2015. Mr. Risley sent another email to Mr. Patel five months later on April 7, 2016. In this email, Mr. Risley informed Apple that the Board had "confirmed the patentability of all claims" of the patents-in-suit. He concluded the letter by once again stating Zipit's belief "that Apple has and continues to infringe" the patents-in-suit.
The parties thereafter had another phone call on April 26, 2016, after which Mr. Patel, on May 2, 2016, responded in writing to Zipit's latest letter. Mr. Patel reiterated Apple's belief that the patents-in-suit are invalid notwithstanding the Board's patentability determination in the IPR proceedings. In response to Zipit's continued allegations of infringement, Apple explained that it had "repeatedly refuted those allegations" and that Zipit had failed to substantively respond to Apple's positions in this regard. The letter concluded: "Should Zipit substantively respond to Apple's explanation of why Apple's products do not fall within the scope of [the patents-in-suit] Apple will further consider Zipit's positions [citations to the record deleted throughout].
The District Court granted Zipit's motion to dismiss for lack of personal jurisdiction under Federal Rule of Civil Procedure 12(b)(2). Although the District Court found that Apple had established "minimum contacts" that satisfied the California long-arm statute and were consistent with constitutional due process limitations on jurisdiction (and that Zipit had not rebutted Apple's "presumptively reasonable" showing thereof), the District Court held that the Federal Circuit had set forth a bright-line rule that "the exercise of personal jurisdiction . . . would be unconstitutional when '[a]ll of the contacts were for the purpose of warning against infringement or negotiating license agreements, and [the defendant] lacked a binding obligation in the forum,'" under Levita Magnetics Int'l Corp. v. Attractive Surgical, LLC, Case No. 19-cv-04065-JSW, 2020 WL 4580504, at *6 (N.D. Cal. Apr. 1, 2020), and Breckenridge Pharm., Inc. v. Metabolite Lab'ys, Inc., 444 F.3d 1356, 1364 (Fed. Cir. 2006). This appeal followed.
The Federal Circuit reversed and remanded, in an opinion by Judge Stoll, joined by Judges Hughes and Mayer. The Court began by acknowledging that the California long-arm statute extended "to the full extent allowed by the due process clauses of the United States Constitution" and thus limited its analysis accordingly. Citing World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297 (1980), the opinion asserts that the issue in determining the appropriateness of finding due process arising in personal jurisdiction situations was whether a defendant's "conduct and connection with the forum State are such that he should reasonably anticipate being haled into court there." The three factors set forth in Supreme Court opinions involving personal jurisdiction set out in the opinion are (1) whether a defendant has "purposefully directed" activities at forum residents; (2) whether the claim to be adjudicated "arises out of or relates to" defendant's activities in the forum; and (3) whether asserting personal jurisdiction over the defendant would comport with "'traditional notions of fair play and substantial justice" under the World-Wide Volkswagen decision. As the opinion sets out, "[t]he first two factors comprise the 'minimum contacts' portion of the jurisdictional framework . . . .," citing Jack Henry & Assocs., Inc. v. Plano Encryption Techs. LLC, 910 F.3d 1199, 1204 (Fed. Cir. 2018). Under circumstances where minimum contacts are satisfied, the Court says, assertion of personal jurisdiction is presumptively reasonable except where the presumption is successfully rebutted by the defendant.
Here, the Federal Circuit, considering the litany of contacts Zipit had with Apple, a resident of the forum, agreed with the District Court that the minimum contacts standard had been satisfied. This conclusion was supported by the Federal Circuit's finding of personal jurisdiction in Xilinx, Inc. v. Papst Licensing GmbH & Co., 848 F.3d 1346, 1356 (Fed. Cir. 2017), where defendant's activities consistent of two notice letters and a single visit with the accused infringer; the panel found "Xilinx [to be] virtually indistinguishable from the facts of this case, where Zipit likewise sent multiple communications to Apple in California and traveled twice to California to discuss allegations of infringement and the prospect of Apple licensing or purchasing the patents-in-suit." (The opinion sets forth several other decisions supporting personal jurisdiction under analogous circumstances.) The Federal Circuit rejected Zipit's argument that its conduct was not sufficient to raise a reasonable presumption that the minimum contacts standard had been satisfied based on the Court's decision in Autogenomics, Inc. v. Oxford Gene Tech. Ltd., 566 F.3d 1012, 1016 (Fed. Cir. 2009). The panel found significant differences ("material factual distinctions") in the facts here and in Autogenomics (which are set forth in a footnote).
The opinion traced back the District Court's error in finding a bright-line rule against asserting personal jurisdiction based on notice letters to Red Wing Shoe Co. v. Hockerson-Halberstadt, Inc, 148 F.3d 1355, 1360 (Fed. Cir. 1998), where the Federal Circuit said that "[p]rinciples of fair play and substantial justice afford a patentee sufficient latitude to inform others of its patent rights without subjecting itself to jurisdiction in a foreign forum." But while this sentiment and the policy arising from it are "no doubt relevant," according to the opinion, particularly to the extent it is directed towards settlement of incipient lawsuits, the panel rejected the argument by Zipit and the District Court's opinion that it reflects or establishes a patent-specific, bright-line rule, citing for example Trimble Inc. v. PerDiemCo LLC, 997 F.3d 1147, 1156–57 (Fed. Cir. 2021), and setting out several analogous personal jurisdiction decisions in other circuits over controversies in other areas of law.
But such a policy does not overcome the constitutional considerations set forth by the Supreme Court in Burger King and other personal jurisdiction cases, the panel opined. To be perfectly clear, the opinion states that:
[T]he district court erred in reading our precedent as creating a bright-line rule that communications directed to "the attempted resolution" of the parties' dispute regarding the patents-in-suit trumps all other considerations of fairness and reasonableness. Although some of our earlier precedent relying on Red Wing Shoe suggests that there is such a bright-line rule . . ., Supreme Court precedent (both pre- and post-Red Wing Shoe) has made clear that jurisdictional inquiries cannot rest on such bright-line rules—there are no "talismanic jurisdictional formulas." Rather, "'the facts of each case must [always] be weighed' in determining whether personal jurisdiction would comport with 'fair play and substantial justice'" [citations omitted].
Having dispensed with this ground of error, the opinion then assessed whether Zipit satisfied the Supreme Court's counter rubric regarding whether a defendant could overcome the reasonable presumption of personal jurisdiction on the basis of:
[1] "the burden on the defendant," [2] "the forum State's interest in adjudicating the dispute," [3] "the plaintiff's interest in obtaining convenient and effective relief," [4] "the interstate judicial system's interest in obtaining the most efficient resolution of controversies," and [5] the "shared interest of the several States in furthering fundamental substantive social policies."
While recognizing that Zipit had asserted some evidence relating to some of these factors (e.g., that there would be some burden in litigating in California because the company, its officers, and employees including inventors resided in South Carolina), on balance Zipit did not assert sufficient facts to convince the Federal Circuit that it had rebutted the reasonable presumption that the District Court could properly exercise personal jurisdiction over Zipit. (It didn't help Zipit's argument that their executives had travelled to the district twice to meet with Apple during licensing negotiations.) Even Zipit's filing its Georgia lawsuit was evidence that it should have "reasonably foreseen" that Apple would respond with a declaratory judgment suit according to the Federal Circuit.
While acknowledging that "we have no doubt that Zipit's initial contacts with California can be fairly viewed as attempting to settle its dispute with Apple out of court, e.g., by way of a patent license," which was "an important fact we consider and weigh in Zipit's favor," the opinion noted that "Zipit's communications with Apple arguably went further, extending over the course of several years and reaching beyond license negotiations to include the sale of its patents." While this attempt at settlement was on Zipit's side of the scales under the Burger King test, the panel held that, on balance, these considerations did not counterbalance their opinion that Zipit had not rebutted the reasonable presumption that the minimum contacts standard had been satisfied and that the District Court could exercise personal jurisdiction over Zipit within the bounds of constitutional due process.
Apple Inc. v. Zipit Wireless, Inc. (Fed. Cir. 2022)
Panel: Circuit Judges Hughes, Mayer, and Stoll
Opinion by Circuit Judge Stoll
Posted at 11:48 PM in Federal Circuit, Miscellaneous | Permalink | Comments (1)
Sun | Mon | Tue | Wed | Thu | Fri | Sat |
---|---|---|---|---|---|---|
1 | ||||||
2 | 3 | 4 | 5 | 6 | 7 | 8 |
9 | 10 | 11 | 12 | 13 | 14 | 15 |
16 | 17 | 18 | 19 | 20 | 21 | 22 |
23 | 24 | 25 | 26 | 27 | 28 |